Q&A: Shift in power, but not strategy — Steve Anderson, NACDS

The results of the 2010 mid-term elections were dramatic, putting the Republican party firmly in control of the House of Representatives. And the GOP’s “Pledge to America” promises big spending and tax cuts, as well as a repeal of the health-reform law, in direct opposition to the goals of the Obama administration and most Democrats. To gauge the election results and what they mean for pharmacy retailing, Drug Store News interviewed Steve Anderson, president and CEO of the National Association of Chain Drug Stores.

Drug Store News: How will the shift in power affect chain pharmacy, and what should chains be doing about it?

Steve Anderson: Our overall strategy will remain the same, even though I think our tactics will change fairly dramatically as we position pharmacy as the face of neighborhood health care. We have been on that journey for about three-and-a-half years. We knew health care would be a big issue in future years, but little did we know how interesting that would be over the last year.

DSN: How is NACDS approaching the change?

Anderson: This really takes several different tracks. As I’ve said several times, we’re probably in the second or third inning of a nine-inning game in terms of implementation of the [health-reform] law that was enacted this year. That will be left to the regulatory agencies, and obviously the agency we focus on most is [the Centers for Medicare and Medicaid Services], which is now headed by Dr. [Donald] Berwick, who is a recess appointment, which means he was not confirmed by the Senate. So that will take its course.

The rather dramatic changes in Congress … will really change our focus in terms of how we address pharmacy issues on Capitol Hill. One thing we did three years ago is to make sure our message is bipartisan in its approach. Obviously, we were working with the Democratic majority in the House and Senate in the 111th Congress. But the writing was on the wall with this election, … and we have made a concerted effort in the last six months to be up on the Hill, talking with the people we thought would be future Republican leaders in health reform.

DSN: Who has NACDS focused on?

Anderson: We had an excellent meeting with Sen. Orrin Hatch, R-Utah, who will become the ranking Republican on the Senate Finance Committee, taking over from Sen. Grassley, R-Iowa. We saw Fred Upton, a Republican congressman from Detroit, who could be the next chairman of the House Energy and Commerce Committee, and Paul Ryan, R-Wis., who is one of the great thought leaders on the Republican side in the House. We saw Eric Cantor, R-Va., who’s going to be the next majority leader in the House, and Republican Barry Jackson, who’s the chief of staff for soon-to-be Speaker John Boehner, R-Ohio.

DSN: What should pharmacy leaders look for from the new Congress?

Anderson: Bottom line, the regulatory process will continue with health reform, because the Republicans don’t have the votes at this point to repeal and replace it. You still have the Democrats in control in the Senate and the president, who can veto anything.

What that also means is that on any given day, you could have a healthcare bill on the floor of the House to do something, whether it’s to implement, repeal or replace health care. And that leaves all kinds of opportunities for pharmacy to be considered.

So there’s a lot going on, and I think we’re really well positioned because we’ve been out there with our message of pharmacy as the face of neighborhood health care.

DSN: Is there a sense that the new leadership will be supportive of that message?

Anderson: In meetings I’ve had, they seem very responsive to our message. Republicans thought we needed some type of healthcare bill, but I think most would have taken the incremental approach I talked about a couple of years ago, as opposed to the massive omnibus bill they ended up passing with all kinds of things in it.

The new Republicans in the House are looking for new solutions, and we think that pharmacy is at the center of those solutions. We have half as many doctors becoming primary care physicians as we did 10 years ago; we’ve got a store 5 miles from every home in the country and people coming out of pharmacy school with doctorates who want to do more than just dispense drugs. Bottom line, we have wrapped everything we want to do around this issue of medication adherence and medication therapy management.

The biggest issue we’re going to have with health care moving forward, both at the federal and state level, is that a vast part of the healthcare bill is going to get kicked down to the states. And there’s no money in state governments, and very little at the federal level. That will be the biggest challenge for anybody involved in health care. In changing the paradigm, we’re focusing on our adherence message. If you really want to drive down costs long term, MTM through pharmacies is one of those solutions.

WAG test drives electric fill-ups

HOUSTON — Walgreens will receive a jolt to its brand image in February as the chain begins playing host to NRG’s eVgo electric vehicle charging stations across 18 locations in the Hous­ton market. The eye-catching stations will help position Walgreens, and such other participating retailers as H-E-B and Best Buy, as cutting-edge companies with an eye to the future — and as responsible neighbors intent to make good on the promise of sustainability.

“This is another way we are providing our customers with an environmentally sustainable shopping experience, and it sets us apart as a retailer who is moving clean and green energy alternatives forward,” stated Menno Enters, Walgreens director of energy and sustainability.

Driving that healthy brand image home to consumers makes sense for retailers today. But down the road, these charging stations — where potential shoppers are captive for as many as 30 minutes — also may represent an entirely new revenue stream for retailers, said Arun Banskota, president of NRG’s EV services. “There is going to be revenue-sharing possibilities in addition to driving more people into these stores,” he said. And that could happen in as little as two years, depending upon how fast any EV market develops, he added.

Similar to the way mobile phone companies quickly drove cell-phone penetration, NRG will be covering all up-front costs — the home charger, at-work charger and publicly accessible chargers — for a subscription fee ranging between $49 and $89 per month.

Under the best market conditions, electric vehicles may capture 10% of the auto market by 2020, projected Antonio Benecchi, a partner at Roland Berger Strategy Consultants. While aggressive, it’s a projection justified by such recent announcements as that of Renault-Nissan CEO Carlos Ghosn, who is targeting production of 500,000 EVs per year as soon as 2013. “The market has almost reached a point of no return with these vehicles in terms of investments that car makers have made [and] investments that the government, at different levels, [has] made,” Benecchi said.

Roland Berger, in partnership with the nonprofit Rocky Mountain Institute, in October released a report outlining how far along major metropolitan areas were in developing the EV infrastructure.

The top five most-prepared cities are along the West Coast: San Jose, Calif.; Los Angeles; San Francisco; Sacramento, Calif.; and Portland, Ore. Houston also was identified as one of the “first-wave” cities.

Cardinal diversifies with Kinray deal

DUBLIN, Ohio — Say goodbye to Kinray, the service-obsessed regional drug wholesaler. But say hello to a more muscular and diversified Cardinal Health.

The wholesale and health services giant announced Nov. 18 it will buy Kinray for $1.3 billion. The buyout, set for completion in early 2011, will be a boon to Cardinal, boosting its customer base to more than 7,000 independent drug stores, extending its reach in the Northeast and adding scale versus its wholesale rivals, McKesson and AmerisourceBergen.

Equally important, the addition of Kinray’s 2,000 independent customers in the New York/New Jersey metro area propels the company ahead in its efforts to diversify its customer base, which in recent years has become precariously dependent on two chain pharmacy giants, Walgreens and CVS, for half of its distribution revenues.

“The acquisition grows [Cardinal’s] base of customers by [more than] 40%,” said Adam Fein, founder and president of Pembroke Consulting. However, he warned, “they’re going to have a big challenge in retaining those customers. Kinray had a unique reputation.”

Indeed, Kinray’s service reputation and close ties to independents are legendary. Applying that kind of personalized culture to the much bigger scale of Cardinal’s business model will be challenging, but Cardinal chairman and CEO George Barrett appears to put a high premium on Kinray’s customer service standards, saying his company will work “to continue that tradition.” And Kinray’s customers, he said, will benefit from Cardinal’s “branded pharmaceutical programs, inventory and pharmacy management tools, and … extensive generic drug program.”

For Kinray, it’s the end of a remarkable, 36-year run as a privately owned juggernaut, and a bonanza for its owner and CEO, the colorful and socially connected philanthropist and billionaire Stewart Rahr. Beginning in the 1970s, Rahr built the Whitestone, N.Y.-based company into a distribution powerhouse, thanks to an obsessive commitment to personalized, responsive service; high-tech order and fulfillment muscle; and rapid order turnaround. Kinray ships prescription and over-the-counter medicines, health-and-beauty aids and home health products across the United States, but its real strength lies in the Northeast, where it generates most of its $3.5 billion in annual revenues.

One thing that motivated Rahr to exit the market now, Fein observed, is “the level of competition in the wholesale market. Margins are continually under pressure, and the scale to buy generic drugs is crucially important.”

That last factor, he told Drug Store News, will work to Cardinal’s advantage, given the company’s massive generic purchasing and distribution capabilities and economies of scale.

On the other hand, Fein said, “Cardinal … has numerous challenges in rebuilding a position in the independent market,” given its efforts to rejuvenate its Medicine Shoppe franchise program. With Kinray, “they’ve acquired a company that has a reputation, culture and heritage in serving that customer very well. That’s a big net positive for them,” Fein added.

Cardinal also is restructuring its Leader marketing program for independents, Fein noted. “Their over-focus on large customers, and the big competitive threat from Health Mart, has really put them in a defensive posture. So they’re trying to go on the offensive by restructuring Leader, bringing new management to Medicine Shoppe and acquiring Kinray,” he said.

Wall Street endorsed the deal. Standard & Poor’s upgraded its investment rating on Cardinal to “buy,” noting that the acquisition provides the wholesale giant with “needed diversification, since 57% of [Cardinal’s fiscal 2010] revenues comprised only five customers.”

Morgan Stanley Research called the Kinray acquisition the “optimal use of cash” for Cardinal, giving it “greater exposure to independent pharmacies … and to generics.”

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